Why Sell a Home in a Short Sale to Avoid Foreclosure
A short sale is when a lender allows a home to be sold for less than the amount owed on the mortgage. Lenders will usually approve a short sale for borrowers with a financial hardship if the short sale will bring a greater net return than foreclosing and reselling the property. Short sales are becoming common where real estate prices have fallen and the current fair market value of the home is less than the amount owed.
Selling a home in a short sell has long-term advantages for the seller. A foreclosure shows negatively on a credit report for 7 years or more. It is hard to qualify for a new mortgage after foreclosure. A short sell seller may purchase a home within two years of completing the sale. If other bills are paid on time and credit, recovers lenders will allow a new purchase loan two years after a short sell. Technically a borrower may qualify for a new mortgage immediately after a short sale, but lender are not willing to take the risk until credit scores improve over time without late payments. A seller also does receive money at closing. Because of the financial hardship that allowed the short sale the former home owner need time to recover financially and save money for a down payment.
A short sale also has an advantage of giving a homeowner more time in a home. Many homeowners facing possible foreclosure vacate the home. When a short sale is under review by a lender they typically halt foreclosure proceeding while the offer of a sale is being reviewed. Lenders are overloaded with short sales, loan modifications, and foreclosures in the current housing market crash. A short sale purchase offer may be in the review and approval process for three to six months before being at the top of a lender's workload. For lenders short sales make sense as well. Lenders only approve the sell if the net proceeds will be greater than foreclosing and marketing the property later. In the short sale, the lender gets proceeds immediately upon closing with a new buyer. The property does not become a long-term financial drain. Vacant property has a holding cost. The lender is responsible for maintenance, security, and repair work after closing. Distressed property needing fix-up will bring lower offers than a properly maintained property. Vandalism and stolen fixtures are also costly for banks marketing foreclosed homes. Low prices realized when a foreclosure sell again also brings down surrounding property values. This becomes a further liability if those homeowners default on existing loans and depress values more.
A short sale can be a win win situation for the homeowner in default and the lender trying to recover as much of the loss as possible.